An oil worker in western Siberia. The dramatic rise on the price of crude oil has caused factory gate inflation to be faster than expected. Photograph: Alexander Natruskin/Reuters

Factory gate inflation picked up by more than expected last month to its fastest pace in nearly a year, driven by rising energy prices, official data showed today.

The Office for National Statistics said output prices rose 3.5% year-on-year, up from 2.9% and well above the average City forecast of 3.1%. The increase was driven by a two-thirds rise in crude oil prices over the year.

The "core" output price measure, which strips out volatile elements such as food and oil prices, rose to 2.6% from 2% in November.

"It is quite a bit higher than expected on the output price side. It is telling you that there is a little bit more pricing power out there," said Ross Walker at Royal Bank of Scotland.

"Obviously a lot of the jump in the year-on-year rate is an energy base effect story and we knew about this but what we are seeing is nevertheless above and beyond that."

The Bank of England has warned that consumer price inflation – currently 1.9% – could rise above 3% early this year because of a rise in VAT and the end of favourable base effects from the sharp drop in oil prices at the end of 2008.

But Threadneedle Street expects inflation to fall back later in the year because of the amount of spare capacity left by the recession.

"Today's data reinforces the prospect of CPI inflation breaching 3% in the first quarter. But the MPC's job is to look through relative price shifts such as these, and focus on underlying inflationary pressure – which still looks incredibly weak, on the basis of earnings and service sector prices," said Colin Ellis, economist at Daiwa Capital Markets.